Federal Housing Administration (FHA) - Is it Assumable?
Federal Housing Administration (FHA) - Is it Assumable?
The seller gives you the deed to the property after you buy it, making you the joyful new owner. But, did you realize that some homeowners may choose to transfer their mortgages to you as well?
An assumable mortgage, sometimes referred to as a transferable mortgage, enables you to purchase a home by taking over the existing owner's mortgage. Loans from the Federal Housing Administration (FHA), one of the most well-liked types of mortgages for first-time purchasers, are assumable.
If the interest rate on the seller's mortgage loan is lower than current interest rates and you want to save money on closing fees, taking over an FHA mortgage is a wonderful alternative.
If you're considering an FHA loan to purchase a home, one of the things you'll need to know is whether or not the loan is assumable. An assumable mortgage allows the buyer of your home to take over your existing loan, which can be a great way for them to get lower interest rates and monthly payments. Here's what you need to know about FHA loans and whether or not they are assumable.
Can family members assume FHA loans?
If the FHA or Department of Housing and Urban Development (HUD) approves the transfer, then the answer is yes.
As long as you or your child can show that your creditworthiness satisfies FHA requirements, you or your child may assume your FHA mortgage or your spouse's FHA mortgage.
What is an FHA loan and how does it work?
An FHA loan is a mortgage insured by the Federal Housing Administration (FHA). This type of loan is available to both homeowners and buyers. The primary benefit of an FHA loan is its easier qualifying process, making it a popular option for individuals with limited down payment funds, or those experiencing financial hardship due to job loss or other economic pressures. Generally, these loans are designed for people with lower income levels who may not have access to traditional financing. To qualify for an FHA loan, buyers must have a minimum credit score of 580 or higher, be able to demonstrate steady employment history and have the ability to make 3.5% down payments on their purchase. Once approved and qualified , borrowers receive low interest rates and flexible repayment terms, giving them the opportunity buy or refinance a home without breaking their budget.
How to assume an FHA loan?
Obtaining an FHA loan may be a smart financial investment for many potential homeowners. Before you assume an FHA loan, it is important to understand your financial goals and what type of loan works best for you. To assume an FHA loan, the person taking it over must qualify on its own with regards to credit history and income. The lender requires that the borrower demonstrate creditworthiness, typically through an acceptable credit score and documented income verification in order to assume the loan. Furthermore, certain property limitations are applied when assuming this type of loan, depending on the lender and location of your property. Once all necessary paperwork has been filled out and reviewed by your chosen lender, you can become one step closer in becoming a homeowner!
The benefits of assuming an FHA loan
FHA loans have been helping Americans buy a home since the 1930s and have come with a variety of benefits. They are available to both first-time and experienced homebuyers, generally require a lower down payment than traditional mortgages, and even those with bad credit can qualify for them. Furthermore, FHA loans offer higher loan limits than other types of loans, but also require an upfront mortgage insurance premium so borrowers can benefit from lower monthly payments. This can be attractive to many potential buyers who want to find a way to make their dream home more affordable and attainable. As you can see, FHA loans are an accessible and advantageous financing plan that many millennials are turning to when it comes time to purchase their first homes.
PROS OF BUYING WITH AN FHA ASSUMABLE LOAN
Possibility of a lower interest rate
You can benefit from the lower interest rate when you assume the seller's mortgage if rates have increased after they obtained their FHA loan.
Reduced closing expenses
You may be able to reduce closing expenses by taking out a mortgage. Your total closing expenses should be less than they would be with a new mortgage, but you will still have to pay certain closing charges, including an assumption fee from the mortgage lender.
You might not need an appraisal
A real estate transaction can be rapidly ruined by an appraisal that is less than the offer price. Thankfully, the lender won't probably demand a new appraisal if you assume a mortgage.
CONS OF BUYING WITH AN FHA ASSUMABLE LOAN
There will still be an income and credit check.
To determine whether you fulfill FHA eligibility requirements and can afford the monthly mortgage payment, the majority of lenders will run a hard credit search and analyze your income.
You might have to put down more money.
The difference between the purchase price and the remaining loan balance you're expecting will be the down payment. Either you'll make a cash payment to the seller or you'll get a second mortgage to make up the difference. Let's take the scenario where you are purchasing a $300,000 home with a $200,000 mortgage debt. You would have to put down $100,000. By the way, your down payment would be $10,500 if you used a new FHA loan and put 3.5% down on the identical home.
Mortgage insurance premiums will be due (MIPs)
Mortgage insurance premiums (MIPs), which are a requirement for FHA loans, must be paid.
There may be competition if several purchasers are drawn to taking on the seller's mortgage. When purchasers offer a little extra money in exchange for taking on a loan, the value of the home may increase.
When an FHA assumable loan can be a bad idea
There are scenarios when an FHA assumable mortgage isn’t a good idea for a seller or buyer.
For the SELLER
If the lender doesn't provide a seller with a documented release of mortgage liability, an FHA assumable loan may not be a good idea.
The seller is liable for the loan and any issues that may arise, including default, if the original mortgage is taken over without the lender's knowledge and approval. Because of this, it's crucial for a seller to involve their lender right away.
For the BUYER
If the seller's mortgage interest rate is greater than current interest rates, an FHA assumable loan won't help the buyer much. If so, it could be preferable for the buyer to seek a new loan.
For a buyer, taking out an FHA loan might be expensive, especially if the seller has a large amount of equity in the house.
Let's assume a seller has a home worth $500,000 and has paid down $400,000 of their mortgage, leaving $100,000 on the balance (which is the total amount of equity the seller has in the home). You must return the seller's equity of $400,000 in order to absorb the mortgage. You can either finance it with a loan or pay it in full with your down payment.
Things to consider before assuming an FHA loan
Before assuming an FHA loan, there are a few things that should be taken into account to ensure you make the best decision. While these loans can have lower interest rates, they do typically require a larger down payment as well as mortgage insurance premiums. Additionally, borrowers have to qualify for both the loan and its associated mortgage insurance. Homebuyers should also evaluate other loan options to determine what is most suitable for their needs and budget. Ultimately, understanding all of the information behind an FHA loan can help buyers make an informed decision about if this type of financing is right for them.
FHA loans are useful for borrowers who wish to take advantage of lower down payment choices but don't qualify for traditional loans due to their credit ratings or income.
For your application to assume an FHA mortgage to be accepted,
1. 3.5% down payments require a credit score of at least 580, while 10% down payments require a credit score of between 500 and 579.
2. A debt-to-income (DTI) ratio of no more than 43% is required.
3. Your monthly gross (also known as pre tax) income cannot exceed 31% of your monthly mortgage payments.
The mortgage lender will relieve the seller from responsibility for the mortgage upon your satisfaction of the requirements to accept the loan, transferring the mortgage and repayment obligation to you.
Both buyers and sellers should consider the advantages and disadvantages of an FHA assumable loan.
JACOBS & CO. REAL ESTATE, LLC.
12923 Fitzwater Dr. Nokesville, VA 20155
(703) 594-3800 | jacobsandco.com